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F I S C A L I M P A C T R E P O R T

SPONSOR Gonzales

ORIGINAL DATE

LAST UPDATED

2/3/06

2/8/06 HB 674/aHBIC

SHORT TITLE

Department of Health Hospital Phased Gross Receipts

Credit

SB

ANALYST Schardin

REVENUE (dollars in thousands)

Estimated Revenue

Recurring

or Non-Rec

Fund

Affected

FY06

FY07

FY08

(5,643.9)

(12,074.7) Recurring General Fund

(Parenthesis ( ) Indicate Expenditure Decreases)

Relates to SB527 and SB207.

SOURCES OF INFORMATION

LFC Files

Responses Received From

Department of Health (DOH)

Taxation and Revenue Department (TRD)

SUMMARY

Synopsis of HBIC Amendment

The House Business and Industry Committee amendment to House Bill 674 fixes a drafting error

that was contained in the original bill. The original bill contained an effective date of July 1,

2006 but the new gross receipts tax credit contained would not take effect until July 1, 2007. The

amendment will shift the phase-in of the new gross receipts tax credit for for-profit hospitals

forward one year.

Synopsis of Original Bill

House Bill 674 provides a gross receipts tax credit for hospitals licensed by the Department of

Health (for-profit hospitals). The credit equals one half of the state gross receipts tax rate in

FY08 and the entire state gross receipts tax rate in FY09 and beyond.

The bill will be applicable to tax reporting periods after July 1, 2006.

House Bill 674/aHBIC – Page

2

FISCAL IMPLICATIONS

All of the state’s for-profit hospitals are currently located within municipal areas, where the state

tax rate is 3.775 percent. Therefore, the credit will eliminate the state gross receipts tax paid by

for-profit hospitals once it is fully phased in. The bill holds local governments harmless, so for-

profit hospitals will still pay a little over 1 percent local gross receipts tax.

A New Mexico Hospital Association survey on hospital gross receipts payments for FY05 indi-

cates that for-profit hospitals paid gross receipts tax of $16.4 million, of which about $9.9 mil-

lion went to the state. Assuming that the impacted tax base will grow by 7 percent each year, the

credit will reduce general fund revenue by about $5.643.9 thousand in FY07 and $12,075 thou-

sand once it is fully phased-in in FY08.

SIGNIFICANT ISSUES

The bill effectively reduces the gross receipts tax paid by for-profit hospitals from 50 percent of

the normal state rate to nothing once it is fully phased-in in FY08.

About half of New Mexico’s 42 hospitals are for-profit. For-profit hospitals compete with non-profit

hospitals in New Mexico and hospitals in neighboring states that do not pay gross receipts tax. The

New Mexico Hospital Association reports that this bill will remove a competitive disadvantage

against New Mexico’s for-profit hospitals.

According to the NMHA, rural hospitals have no choice but to absorb the costs of uncompensated

care for patients who cannot pay. In addition, it is difficult for for-profit hospitals to pass gross re-

ceipts tax on to consumers because Medicare will not reimburse for it.

DOH believes removing the gross receipts tax from for-profit hospitals will make them more profit-

able and could allow them to provide enhanced services in New Mexico.

The proportion of for-profit hospitals has increased over last few years because for-profit hospitals

have more access to capital.

ADMINISTRATIVE IMPLICATIONS

TRD reports they will experience moderate administration impacts due to this bill. TRD will

need to revise forms, educate taxpayers, train personnel, and modify audit processes.

CONFLICT, DUPLICATION, COMPANIONSHIP, RELATIONSHIP

House Bill 674 relates to Senate Bill 527 and Senate Bill 207, which create the same gross re-

ceipts tax credit but phases it in over different time periods.

TECHNICAL ISSUES

TRD notes that the credit could be taken by hospitals after the deduction in Section 7-9-73.1

NMSA 1978, but it is unclear if the credit could be taken before or after the deduction in Section

7-9-93 NMSA 1978. A taxpayer may be able to claim the credit for receipts that are also eligible

for the deduction in Section 7-9-93 NMSA 1978. TRD suggests amending page 2, lines 10-11

and 15-16 to read “after all applicable deductions have been taken.”

House Bill 674/aHBIC – Page

3

OTHER SUBSTANTIVE ISSUES

TRD notes that receipts from the health industry have historically grown more quickly than gen-

eral revenue. Deducting services from high-growth sectors such as health care from the existing

tax base makes it harder for tax revenue growth to keep pace with inflation.

POSSIBLE QUESTIONS

In December 2005, NMHA told the Revenue Stabilization and Tax Policy Committee that there

is a trend of hospitals converting from non-profit to for-profit because for-profit hospitals have

better access to capital. Hospitals that have converted tend to be older, smaller facilities in small

communities that cannot afford to make improvements through bond issuances or other financing

sources. Does better access to capital give for-profit hospitals a competitive advantage over non-

profit hospitals.

SS/nt:mt